Contraction in China’s Manufacturing Boosts Easing Case: Economy

A taxi driver washes his vehicle on the bank of the Hai River across from the Tianjin Binhai New Area CBD of Tianjin, China. Photographer: Sim Chi Yin/Bloomberg

Dec. 30 (Bloomberg) -- China’s manufacturing contracted for
a second month in December as Europe’s debt crisis cut export
demand, fueling speculation that the central bank may cut
lenders’ reserve requirements within days.

A purchasing managers’ index was at 48.7 in December from
47.7 in November, HSBC Holdings Plc and Markit Economics said
today. A reading below 50 indicates a contraction.

Export orders fell in December for the first time in three
months and domestic demand was “sluggish,” today’s report
said. Demand for cash ahead of the week-long Chinese Lunar New
Year holiday starting Jan. 23 may give officials an additional
reason to cut banks’ reserve ratios after a reduction last month
that was the first since 2008.

“A reserve ratio cut is likely to happen by Jan. 3, before
markets resume trading,” said Li Wei, a Shanghai-based
economist with Standard Chartered Bank. China’s exports are
under threat because “the euro area is slipping into a
recession and the U.S. is also expected to slow down in early
2012,” Li said.

A deeper slowdown in China, the world’s second-biggest
economy, would impair a global expansion that is already
faltering because of Europe’s austerity measures. Asian stocks
rose today, paring the regional index’s first annual decline in
three years, on signs of strength in the U.S. economy, where a
report yesterday showed stronger-than-forecast home sales.

‘Starting to Bite’

In China, “weakening external demand is starting to
bite,” said Qu Hongbin, a Hong Kong-based economist for HSBC.
Policy easing may enable China’s economy to avoid a “hard
landing,” he said.

Elsewhere in Asia, data from South Korea showed the
government wrestling with elevated inflation even as threats to
growth mount. The leadership handover in North Korea as Kim Jong
Un takes control after the death of Kim Jong Il may undermine
confidence in the South by adding to the risk of instability on
the Korean peninsula.

South Korea’s inflation exceeded the central bank’s target
and all forecasts in a Bloomberg News survey, limiting the scope
for an interest-rate cut in January to support growth. Consumer
prices rose 4.2 percent from a year earlier, matching November’s
gain, Statistics Korea said. The median estimate of 12 analysts
was 4 percent, and the central bank targets inflation of 2
percent to 4 percent.

Australian Lending

In Australia earlier, a central bank report showed private
lending by banks and other financial companies rose 0.3 percent
in November from the prior month, matching the median of nine
economists’ forecasts.

In Europe today, reports may show house prices in the U.K.
were unchanged in December from a month ago and German retail
sales rose 0.2 percent in November from the prior month,
according to the median estimates of economists surveyed by
Bloomberg.

In Spain, a report may show consumer prices advanced 2.5
percent in December from a year ago, while figures on Italian
producer prices may show a 0.1 percent gain in November from the
month before, surveys showed.

The Chinese manufacturing index released today is based on
answers to questionnaires sent to purchasing executives at over
400 manufacturing companies. The statistics bureau and the China
Federation of Logistics and Purchasing will release a separate
manufacturing index on Jan. 1. Last month, that gauge showed the
first contraction since February 2009.

Property Crackdown

In November, China’s export growth was the weakest since
2009, excluding seasonal distortions at the start of each year.

Hitachi Construction Machinery Co., Japan’s second-largest
heavy-equipment maker, said this month that Chinese demand for
excavators will decline in the first half of next year, as the
government prolongs a crackdown on property speculation.

Developer China Vanke Co.’s contract sales dropped 36
percent last month from a year earlier, while new home prices in
Shanghai, Beijing, Shenzhen and Guangzhou slid from the previous
month.

China’s inflation slowed to 4.2 percent in November, the
slowest pace in 14 months. Third-quarter economic growth of 9.1
percent was the least in two years.